What Does Your Beer Really Cost?

Establishing an Effective Beer Costing Program in the Brewpub

Your brewpub has been open a few years, you’re making award-winning beers, you’re a centerpiece of the community, and you’re even making a profit. Employees are happy, the bank is happy, investors are happy, and you’ve managed to get your work week down to a manageable 70 hours. Labor expenses are steady and manageable, food cost is at the industry average, and beer cost is “around” 10 percent. That’s good, right? Right? If you don’t have a clear view of the cost of your beer, you may be pouring dollars down the drain (literally). A well-established cost analysis will not only provide valuable data on the real cost of selling your suds, but may also identify areas of opportunity such as purchasing, labor and compensation analysis, and reducing waste. Many different methods exist for calculating beer cost, and in this article I’ll describe the ones I find valuable, in addition to a few I don’t (and why). by Scott Metzger If you don’t have a clear view of the cost of your beer, you may be pouring dollars down the drain (literally). Gross Sales and Revenue dient used times the price of each ingredi- you’re staying up-to-date on your per-recipe Per Barrel ent used and sum up the totals. Costing out costs, the cost associated with any specialty Top line revenue is a number we’re all quite each recipe like this provides the opportuni- ingredients will be captured by the respec- aware of, and we can usually gauge a suc- ty to look at ingredient costs on a per-brand tive values of your beer inventory. cessful (profitable) month from a bad one basis. If your POS System provides a Prod- Ideally, your aggregate raw ingredient based on this number alone. This will vary uct Mix report, you’ll be able to compare costs should be close to your per-brand by establishment, but our brewpub’s prices the revenue taken in per brand versus the costs. If you’ve calculated that all your are inclusive of state and local sales tax; so cost to produce it. For example, you sold 5 brands should be costing between 4-7 per- a $5 pint is actually a $4.62 pint with $0.38 barrels of Pale Ale and brought in $4,000 in cent, but your aggregate cost is 15 percent, of taxes tacked on. I bring this up because revenue. Your recipe costing comes out to you’ve got problems (where did all those in- I prefer to look at beer costs against the $50/barrel, thus your raw ingredient cost gredients go? Where are all the sales?). gross revenue collected before deducting for that brand is 6.25 percent ($50/barrel in Industry-wide benchmarking of raw in- sales taxes—usually this will be a different cost divided by $800/barrel in revenue). gredient costs can be difficult because even number than what you find on your income While the above calculation is handy, it a $0.06/lb price break on grain or high ship- statement, which has those sales taxes net- does have a few limitations. For example, a ping costs due to your geographic location ted out. Pre-tax analysis allows for a com- small brewery or brewpub measuring out can make a big difference. When you consid- parison of taxes as a percentage of the total ingredients using a rudimentary scale (or er a brewpub’s propensity for using wacky price paid by your customers versus all of even just “eyeballing it”), a few extra ounces (and costly) ingredients, industry bench- the other cost factors. No matter if you use of hops, or a couple of pounds of grains for marks become even more of an apples-to- revenue before or after sales taxes are de- each brew can add up over the course of a pomegranates comparison. Then consider ducted, it’s important to be consistent in its month. Another major limitation of the per- the fact that a pint at a brewpub in New use throughout the entire analysis. If you are brand analysis is that your POS may not be York City brings in significantly different a data-hound like me, you’ll probably calcu- set up to capture every sale on a per-brand revenue than a pint in Papillion, Neb.—fur- late it both ways—just make sure you aren’t basis. At our brewpub, for example, growler ther skewing those industry averages. The comparing pre-tax to post-tax figures. fills are aggregated together and not segre- best approach to benchmarking is to com- Revenue per barrel is another revenue- gated by brand. This can throw your per- pare your aggregate raw ingredient costs side metric that can provide quick insight brand analysis out of whack from the rev- back to a weighted-average of your recipe into trends in the brewpub and potential enue side (denominator of the equation) if costs. If your IPA costs around $60/bbl to losses/waste at the bar. It would be a rather your growler fills (or any other sale that isn’t make and is 75 percent of your volume, and difficult and time-consuming task to try to segregated by brand) don’t follow the same your Porter is the other 25 percent of sales exactly match your product mix report to product mix as your draught sales. and costs $40/bbl to make, then your aggre- your monthly count of barrels sold, but if The most accurate method of calculating gate beer costs should be relatively close to you are selling at an average price of $3.50/ your Raw Ingredient Costs is on the aggre- $55/bbl. pint, then you should be somewhere around gate level, considering the cost of all ingre- $800/barrel (assuming 8-10 percent for loss/ dients versus the total revenue taken in from Total Beer Costs waste). If you sold 100 barrels but your beer beer sales, as such: (My Favorite Version) revenue for the month came in at $50,000, [FBB + FIPB + IU – FBE - FIPE] = As any hardworking brewer would tell you, then a) you’re not really selling at an average Aggregate Ingredient Costs ingredients alone do not a good beer make. price of $3.50/pint; b) you didn’t really sell Beer Cost % = Aggregate Ingredient Costs There are a number of other cost factors to 100 barrels; or, worst-case scenario c) some- / Revenue from House Beer Sales consider in order to get an accurate mea- one is stealing your beer. At our brewery, Where: sure of what your beer is costing you. My we normally fluctuate between $700 and FBB = Value of Finished Beer Inventory, preferred computation of Total Beer Costs $800/barrel, but that number will typically Beginning of Period looks like this: push closer to $900/barrel in the winter FIPB = Value of Beer Inventory, Fermenta- Total Beer Cost = Aggregate Ingredient when we have bigger, higher-priced beers tion in Process, Beginning of Period Costs + Labor Cost + Utilities + Excise available. Revenue per barrel is a good num- IU = Value of Beginning Raw Ingredient Taxes ber to track over a period of time so you can Inventory + Purchased Raw Ingredi- Total Beer Cost % = Total Beer Cost / Rev- start understanding seasonal trends and get ents – Value of Ending Raw Ingredient enue from House Beer Sales a grasp of the range into which you should Inventory On Labor Costs, if your brewer wears normally fall. When you get a period that FBE = Value of Finished Beer Inventory, many hats (as often they do), you will want falls outside of the norm, it’s a signal that End of Period to segregate that time out from what you al- it’s time for a closer look at what’s going on. FIPE = Value of Beer Inventory, Fermenta- locate to beer costs. If he or she is 75-per- tion in Process, End of Period cent brewer, 25-percent front-of-house man- Raw Ingredient Costs Note: While we usually use yeast for ager, then only count 75 percent of labor The first step in getting a handle on beer many generations, for simplicity I typical- expense to the brewery. costs is an accurate accounting of the raw ly assign the full cost of new yeast to the Allocating utility costs can be tricky be- ingredients that go into the production of month it was purchased. cause brewpubs also have kitchens, restau- your brewpub’s suds. I like to come up with To calculate the value of your beer in- rants, and bars drawing a lot of power in ad- a cost for each recipe we brew in addition ventory, apply the per-recipe cost method dition to the brewery. A one-time analysis of to the aggregate cost for brewing operations above. The aggregate method will pick up the distribution of your power uses may be each month. the cost of any ingredients that may be mis- helpful, but on an ongoing basis it is appro- Recipe costing is simple and straightfor- placed, lost due to inaccurate measurements, priate to use a static percentage in assign- ward—multiply the quantity of each ingre- or worse, disappearing out the back door. If ing utility costs to your beer. Any month-to- Photo © Shuterstock

62 The New Brewer January/February 2012 BrewersAssociation.org Photo © Shuterstock

BrewersAssociation.org The New Brewer January/February 2012 63 month variances are going to cost more to your beer or someone else’s, and thus are tion-included costs to that of selling kegs figure out than the value they’ll provide in not germane to the cost of your beer. of mass-produced lager (for example), then your analysis. Depreciation, in my opinion, has limited you may have some further explaining of With any item in my analysis, I always usefulness as far as beer costing goes. Pro- the nuances of a brewpub to do. ask “would we be paying this if we were a ponents of its use argue that it allows you multi-tap without a brewery?” Excise taxes to benchmark against industry averages for Packaged and Outside are a perfect example. We only pay them serving guest beer. While this may be true, Account Sales because we make beer, and they’re an im- it is incapable of giving your brewery credit If you are doing any kind of packaging or portant cost factor to include. for the incremental value provided by the sales to outside accounts, you’ll want to simple fact that it’s a brewery. Furthermore, segregate this volume out and cost it sepa- Depreciation and Sales Taxes after you’ve fully depreciated your brewing rately. Your costs as a percentage of sales Two important costs I leave out of my analy- assets, it’s not like your beer actually be- are going to be vastly different from these sis are depreciation and sales taxes. In the came less costly to produce. If you have an revenue streams, and by co-mingling some case of the latter, sales taxes (if applicable investor asking for an analysis that includes of them all you are really doing is making in your state) are something you’re going depreciation to determine “if it is worth it your analysis worthless for evaluating any of to have to pay regardless of if you’re selling to be a brewpub” by comparing deprecia- them. At our brewpub, we do a very limited amount of packaging for sales on-premise, but are very thorough in separating out costs. We assign the per-brand cost of vol- ume sold to our bottling operation, add all packaging costs (including labor associated to packaging), and apply it against revenues from bottle sales. We knew our operation of hand-bottling and releasing a couple hun- dred bottles at a time was cost-inefficient, but we didn’t realize how much so until I performed a thorough analysis. Our bottle sales have increased to the point where the potential cost savings can justify the pur- chase of a small bottling line.

Putting Information to Work Having a slew of new information at your fin- gertips doesn’t mean anything if you aren’t using it right. At our brewpub, beer costs (both raw ingredient and total beer costs) are used in our bonus matrix and our tar- gets need to be hit before bonuses are paid out. As your brewpub grows and you see your bottom line in the black consistently, it is easy for a small business to lose track of costs and fall into the trap of “we’re making money, so everything must be good.” The business that loses sight of costs won’t be in the black for long. An effective beer costing program can also do wonders for your top- line revenue so far as it can provide pricing guidance. Craft beer drinkers are price sensitive too—if your costs are extraordinarily low, then perhaps you could afford to lower your prices and generate additional revenue through increased volume. No matter how you use the information, the key is to be consistent, track costs over time, and actu- ally do something with it!

Scott Metzger is founder and CEO at Freetail Brewing Co. in San Antonio, Tex- as. He is a member of the Finance Com- mittee of the Brewers Association and an adjunct professor of economics at the University of Texas at San Antonio. n

64 The New Brewer January/February 2012 BrewersAssociation.org BrewersAssociation.org The New Brewer January/February 2012 65